The sign of a good strategy is that it makes some customers unhappy

“The sign of a good strategy is that it makes some customers unhappy” – Michael Porter, Harvard Business School.

What strategic position does your business hold? Is it variety-based, access-based or needs-based?

In this short series of articles I’ll share what one of Harvard’s leading experts has to say about strategy, and explore how to apply that to the world of telecoms service providers.

I’m currently training for my first ever marathon, and last weekend my training called for a 19 mile “long run” (no kidding). One of the great things about these runs is that I can spend a lot of time listening to audio books and thinking. And I mean a lot of time, because I don’t run very fast…

On a recent run I was listening to a book that’s a compilation of HBR’s best 10 articles on strategy. The first one was by Harvard Business School Professor Michael Porter entitled “What is Strategy?” and it was so packed with insights that I spent the next 2 hours of my run just thinking over what he’d said – and have since re-listened to the article not once, but twice.

On the off-chance that you don’t have an hour to spare to read that most-excellent article, I’ll do my best to summarize the key points in the next few paragraphs.

What is Strategy? by Michael Porter – a summary

Porter’s first observation is that companies focus extensive efforts on Operational Effectiveness (OE), which he defines as “performing similar activities better than rivals perform them”.

He argues that while these efforts are necessary, they’re hardly sufficient for sustained success, as over time all well-managed businesses will work towards the industry best practices in their operations, with the result that “the productivity frontier – the maximum value a company can deliver at a given cost – shifts outward, lowering costs and improving value at the same time”.

If all competitive companies become more effective this is great for consumers, as they get better products/services at a lower cost, but since everyone is doing it no advantage is gained by any one company – so no-one makes much profit.

When everyone’s competing in the same way, the winning margins are slim.

As an aside, this ties in well with another book I listened to recently – Zero to One by Peter Thiel where he argues that any great company needs to establish a virtual monopoly in their particular space, as otherwise competition will eventually erode all profits.

While Operational Effectiveness is undoubtedly important, Porter believes that many companies neglect strategy, which he defines as “the creation of a unique and valuable position, involving a different set of activities”.

This last part is important: he views positioning (identifying a distinct role in the marketplace) as a big part of strategy, but a position can only be protected from competitors if it requires the organization to undertake a different set of activities to fulfill the needs of the customer.

You can’t just tell everyone that you’re different – you actually need to be different. But performing different activities is not enough either – those activities must involve trade-offs. There must be a cost involved in focusing on these particular activities, such that a competitor can’t easily take your position in the market without harming their ability to maintain their existing position.

“The sign of a good strategy is that it makes some customers unhappy” – Michael Porter

What is a trade-off?
A trade-off occurs when you choose to perform activities that produce a better product or service for some customers, but produce a worse product or service for other customers. There must be a cost to the new activity. Otherwise you’re just making an improvement (moving closer to the productivity frontier) and eventually your competitors will copy that improvement. The trade-off is what protects you from competition, because competitors won’t want to pay the penalty involved in the trade-off.

Of course, one or two trade-offs aren’t enough – if your position is sufficiently valuable, a competitor may choose to abandon their current customers and try to copy how you do things.

In order to create a significant barrier to entry, to protect your business from competitors who want to take your position, strategy requires creating “strategic fit” among a company’s activities. This means creating an entire system of interlocking activities, each of which is different as a result of your position, and where each part of the system reinforces the other parts.

If you create such a system, a competitor cannot compete with you by simply copying parts of the system, but must instead understand and replicate the entire system to gain the benefits. The more complex the system, and the better each part reinforces the others and your position, the harder this becomes.

In the article, Porter identifies three ways a company can create a unique and valuable position. A company can choose to:

serve few needs of many customers (“variety-based positioning”) – in other words the business is a specialist in one particular product or service
serve broad needs of few customers (“needs-based positioning”) – in other words, develop a strong relationship of trust with a valuable customer and then focus on serving that customer in whatever way they need
serve broad needs of many customers in a narrow market that is hard for competitors to access (“access-based positioning”) – in other words, serve customers through a channel than is difficult for competitors to access.

A rural general store employs an “access-based” strategic position

Types of Strategic Positions – Examples from Telecoms

I found it a little difficult to get my head around these different types of strategic position, so in case you’re in the same boat let’s look at some real-life examples – some from the article and some from the world of telecoms.

Variety-based positioning

Porter’s original example here is Jiffy Lube, a car maintenance business that only provides oil changes. They focus on one variety of service (oil changes) and as a result of this specialization they can both capture more customers who want this service and can perform the service better that a general car maintenance business (presumably – I have insufficient personal expertize to compare the quality of oil changes at Jiffy Lube vs Bob’s Auto Repair Shop).

In the world of telecoms Acme Packet (prior to their acquisition by Oracle) occupied a variety-based position. If you needed a Session Border Controller (SBC) then you went to Acme Packet. Their focus on a single product helped their marketing efforts because the company was so closely associated with that one product, and it also allowed their entire organization (from developers to sales to the support team) to become SBC experts.

Needs-based positioning

Porter’s example was Bessemer Trust, which is an investment management company focused on the super rich. This highly successful company employs expert customer account managers who can advise their clients on all aspects of their finances, and can take care of whatever financial need they have – whether that’s creating family trusts or managing oil investments.

In the world of telecoms I actually wonder if this is the position that Metaswitch could have taken in an alternate universe. [Please forgive me a digression into Metaswitch’s strategy as this is a company near and dear to my heart.]

One of the things that allowed Metaswitch to gain such a great reputation among regional carriers in the mid-late 2000s was that they provided an incredibly high level of support to their customers. This support went above and beyond fixing bugs in their products. Metaswitch often invested heavily in helping carriers be successful as they transitioned from TDM to VoIP in their networks.

I wonder what would have happened if Metaswitch had decided to meet all the needs of this customer group. They went partly in that direction – providing a switch that excelled at both TDM and VoIP (c.f. Coppercom and Broadsoft that focused on one side or the other), and also voicemail, conference servers, and eventually an SBC. However I wonder if they could also have jumped into the realm of access-side equipment – taking on Calix and Adtran – thereby providing a true one-stop shop for this base of customers, not only in terms of products but also in terms of the expertise required to successfully operate a network built from these products.

Of course, in our reality, they instead built a world-class SBC (Perimeta), focused heavily on architecture decisions (NFV and now containers), and have recently invested in VoLTE. These decisions emphasized Metaswitch’s technical strengths and the desires of Tier 1 carriers – so there were absolutely good reasons for these decisions – but did they lose out on an opportunity to double-down on their initial success in North America?

Access-based positioning

It’s taken me some time to really understand this last idea – “serve broad needs of many customers in a narrow market” – but I think the key is that these customers need to be accessed in a different way. Perhaps they’re geographically in a different place, or interact with marketing and sales in a different way.

The example given in the article was Carmike Cinemas (since acquired by AMC and renamed AMC Classic – the article’s from 1995) who focused on small towns and cities and had various strategies for keeping costs low while still providing great movies. Carmike apparently had only one full-time employee in each location – a local theater manager who spent much of his/her time engaging with the local community to build an audience.

On reflection, access-based positioning is actually the best way to describe where many regional telephone companies stand today. Many independent operating companies (IOCs) were created due to the failure of the incumbent carriers to provide phone service to a particular rural community. As a result a new company was established to provide phone service to many customers in a specific geography that couldn’t easily be accessed by the incumbent carriers. That sounds like a great example of access-based positioning.

Summary of the summary

After that diversion into the world of telecoms positioning let me circle back and recap the two insights from the original article that struck a chord most clearly for me.

Efficiency is not enough. You need a competitive strategy – a position in the market that establishes you as different to your competitors in a valuable way.
The position you hold is only sustainable if it requires different activities – activities that require trade-offs – and you must build those activities up into a self-reinforcing system that allows you to provide value to your customers far better than any competitor who tried to target those same customers.

Of course, I’ve spent a lot of my career focusing on Operational Effectiveness – I really enjoy the concrete feeling of progress as you improve the quality and efficiency of a process – and I’ve even written about that before (What I learned packing boxes and Why does your NOC have so many trouble tickets?) but the article really challenged me to consider both my own strategy with my consulting business, and then beyond that, to ponder the strategies of my clients.

In the second part of this series I’ll apply these ideas to regional telephone companies (local IOCs) to see how they can focus their energies to thrive in the current competitive environment.

If that’s not you, the third part of the series looks at service providers focusing on offering hosted PBX services to businesses.

In the conclusion, I try to apply these principles to my own consulting business, and then issue a challenge to anyone reading this.

I’ve been inside my own head on this topic for weeks – so now I need to hear from you. What did I get right? Where am I going astray? Do you have a clear strategy, and if so, what is it?

What is Strategy? by Michael Porter – a summary

Types of Strategic Positions – Examples from Telecoms

Summary of the summary

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